Rules to Curb Illicit Dollar Flows Create Hardships for Iraqis

BAGHDAD — When the United States and Iraq put tough new currency rules into effect recently, the intent was to stem the illicit flow of dollars to those targeted by U.S. sanctions on Iran, Syria and Russia, as well as to terrorist organizations and money launderers.

But in a country with a primarily cash economy, the changes created unintended hardships for ordinary Iraqis who need dollars for legitimate business purposes or travel abroad. Dollars have run short, and the cost in Iraqi dinars at some local currency traders has surged.

Long lines are forming early in the day outside money changers’ shops, where Iraqis planning to travel outside the country often turn up grasping plastic bags stuffed with dinars, which banks outside the country do not accept. These days, it’s not easy to find a money changer who still has dollars. And those who do run out early.

“I don’t have any dollars left,” one currency trader, Abu Ali, said last week at his shop in Baghdad’s Karrada neighborhood.

The new currency rules, worked out in an agreement between the United States and Iraq, require greater transparency surrounding the transfers of dollars held as foreign currency reserves for Iraq in an account at the Federal Reserve Bank of New York. They went into effect late last year.

The agreement was part of a long-delayed modernization of Iraq’s financial system as it begins to conform to the rules that most countries follow and adapts to requirements for more transparency in international financial transactions.

Every day, the Central Bank of Iraq facilitates the withdrawal of a large sum of dollars from its account at the New York Fed. The transfers are critical because, in Iraq’s largely cash economy, only a few businesses accept credit cards and almost no ordinary Iraqis have one. Even bank accounts are a rarity.

Some of the money is wired on behalf of Iraqi businesses to pay for goods from outside Iraq. Some of it is designated for currency exchanges and banks to distribute to Iraqis traveling abroad.

But there has been little in the way of electronic footprints to help U.S. officials trace whether some of the transfers were ending up in the hands of parties targeted by U.S. sanctions.

The concerns date back to soon after the 2003 U.S. invasion of Iraq.

At that time, American authorities tried unsuccessfully to document the chain of custody for billions of dollars transported to the country in cash over a period of years. In one instance, $1.2 billion from Iraq was found in a Lebanese bunker with no record of how it got there, according to a New York Times investigation in 2014.

The U.S. Treasury wanted to ensure that dollars were not being sent in violation of U.S. law to fronts or agents for parties under sanctions or terrorist entities. In congressional testimony in 2016, for example, a top Treasury official noted three groups targeted by sanctions that were known to be active in Iraq: Al Qaeda, the Islamic State and the Iran-backed Lebanese militia Hezbollah.

With the Islamic State’s takeover of northern Iraq in 2014, it seized of a branch of Iraq’s central bank and those worries became more urgent.

The situation underscored the need for more transparency in dollar transfers to Iraq, according to a U.S. Treasury official, who asked not to be named because he is not authorized to speak with reporters.

After the Iraqis finally defeated the Islamic State in 2018, Iraqi and U.S. bankers and the Treasury began to discuss a new system for money transfers.

Under the new regulations, both individuals and companies requesting wire transfers of dollars must disclose their own identity, and the identity of whoever is ultimately getting the money. That information is then reviewed by an electronic system as well as by experts at Iraq’s central bank and the New York Fed, before payment is made.

The new system allows banks around the world to conduct automatic checks on transfers of money from Iraq to other countries, said Ahmed Tabaqchali, the chief strategist for Asia Frontier Capital’s Iraq fund.

“In short, the system heightens the visibility of red flags,” he said.

Now, many requests are being rejected, said Mudher Salih, a former deputy head of Iraq’s central bank and now a financial policy adviser to Iraq’s new prime minister, Mohammed Shia al-Sudani. Sometimes, he said, that is because of suspect identities but other times it is because many Iraqi businesses do not have the requisite licenses to import goods or are not properly registered as commercial entities and therefore are in violation of Iraqi law.

The rejections have created a shortage of dollars, which has sharply increased their cost for Iraqis with legitimate needs, he added.

Since 2003, there have been two Iraqi dinar rates for buying dollars; an official rate established by Iraq’s central bank and an unofficial street rate, which is higher. And when dollars are scarce, the street price goes up.

The difference between the two is creating hardships for Iraqis like Janna, a mother of four. She said she had been saving up to buy a refrigerator and had her eye on a German model that cost about $250. In October, that was the equivalent of 320,000 dinars. Today, because of the scarcity of dollars, the refrigerator would cost 375,000 dinars.

“It’s more than I can afford,” she said.

After the new currency rules took effect, the quantity of dollars flowing daily into Iraq fell sharply — on some days down by nearly 65 percent from $180 million to $67 million — compared with the period before the rules were implemented, according to daily cash flow numbers released by Iraq’s central bank.

The influx of dollars has since picked up, but it is still often less than half of what it was before the new system was put in place.

It is not clear exactly how much of the drop in dollars reflects illicit recipients who have now either stopped requesting money because they do not want to make the disclosures required by the new rules or because the Iraqi central bank or the New York Fed rejected their requests.

“I would not put down to fraud the almost 90 percent drop,” said Douglas Silliman, president of the Arab Gulf States Institute in Washington and a former U.S. ambassador to Iraq. “Maybe it’s 45 percent fraud and 45 percent incompetence or just not knowing how to deal with the new regulations.”

Yasmine Mosimann contributed reporting from Baghdad.